UK Social Security and Child Support Commissioners' Decisions

[2005] UKSSCSC CSCS_1_2005 (25 October 2005)

THE CHILD SUPPORT COMMISSIONERS

Commissioner's Case No: CSCS/1/05

CHILD SUPPORT ACTS 1991 AND 1995

APPEAL FROM THE CHILD SUPPORT EDINBURGH APPEAL TRIBUNAL UPON A QUESTION OF LAW

DEPUTY COMMISSIONER: SIR CRISPIN AGNEW OF LOCHNAW BT QC

Oral Hearing

Appellant:

1st Respondent: Secretary of State

2nd Respondent:

Tribunal: Edinburgh Tribunal Case No:

DECISION OF DEPUTY CHILD SUPPORT COMMISSIONER

Decision

1. I hold that the tribunal erred in law. I allow the appeal. I consider that I have sufficient information available to me to give the decision that the tribunal ought to have given.
2. My decision is:

2.1 That there should be a variation on the grounds of assets only under Regulation 18.

2.1.1 The asset to be excluded under Regulation 18(3)(b) Child Support (Variations) Regulations 2000 is 98 shares in the NRP's company valued at £301,069.72.

2.1.2 The assets to be taken into account in determining the weekly value of the assets are:

The assets set out on page 137 amounting to £196,140.58 in value;

The Director's loan account valued at £16,537; and

1 Share in the NRP's Company valued at £3072.14

2.2 There should be no variation on the grounds that income has been unreasonably reduced in order to reduce liability to pay child maintenance under Regulation 19 of the Child Support (Variations) Regulations 2000.

Background

3. This is an appeal against the decision of the tribunal that determined (i) the non resident parent [NRP] had not unreasonably reduced the amount of his income under Regulation 19(4)(b) of the Child Support (Variations) Regulations 2000 (the "Variation Regulations 2000") and (ii) that £300,000 of the £500,000 of the NRP's assets were to be disregarded under regulation 18(3)(b) of the Variation Regulations 2000. The parent with care [PWC] had been granted leave to appeal by the Commissioner
4. I held an oral hearing on 3 October 2005 at which:

4.1 the PWC was represented by Ms Dowdalls, Advocate instructed by Balfour & Manson;

4.2 the Secretary of State was represented by Mr Brodie, Advocate instructed by Miss Parker;

5. 3 the NRP represented himself.

Factual background

6. The NRP is a journalist and operated through the medium of a limited company of which he held 99 shares and his wife held 1 share. The tribunal found that as had been the practice before the separation, the NRP was paid a salary by the company of about half the income to the company. The balance was retained to pay a pension contribution and to build up funds in the company as a cushion when the NRP's current contracts came to an end and he would probably have to start a free lance business. The NRP was living in rented accommodation, pending a divorce settlement with his wife, the PWC, and stated that he was retaining assets in order to be able to fund the potential settlement, his legal expenses and then to buy a house suitable for himself and the children on contact visits. This outline of facts, was to an extent, in dispute at the hearing.
7. It was agreed that the relevant date for calculation was 16 September 2003.

Tribunal's decision

8. The tribunal held that the PWC was entitled to a variation in respect of £200,000 of the NRP's assets of £500,000, but that the NRP had not reduced his income principally in order to reduce his liability to pay child support maintenance.
9. The tribunal issued a Statement of Reasons, the relevant parts of which were as follows:

"6. There was no dispute that the second respondent was in a position to control the level of his income by way of director's enrolments [emoluments] from his company and/or the payment of dividends. In fact, the second respondent had restricted his income for a number of years both prior to and after his separation from the appellant. The most recent Financial Statements showed that his gross income as a director in the years ended November 2002 and 2003 was £32,650. It was not disputed that the company paid £12,000 as a pension contribution for the second respondent. In those 2 years the retained profit of the company was £66,482 and £66,970 respectively. As a consequence of this practice, capital had been build up in the company and as at 30 November 2003 Shareholder's Funds amounted to £307,214.

7. The second respondent explained that there were a number of reasons why he chose to restrict his income. He was effectively self employed and had no guarantee of future income. His principal contract with a TV company and he was now the second oldest TV presenter in Scotland. Previously he had been able to derive additional income from writing for other newspapers and periodicals. The terms of his contract with the TV company were such that he was no longer allowed to do so. He envisaged a time in the future when the TV company contract would terminate and he would have to find alternative work. This was likely to be self employment for which capital would be required. Further, he was incurring substantial legal costs in connection with the ongoing financial negotiations with his wife who was claiming a one half share of his assets and a further £100,000. He accepted that his wife would be entitled to one half share of the matrimonial assets. Since the separation he had been living in rented property but wished to buy a house or flat. Until there was a settlement with his wife, he was unable to do so because he did not know what his future financial position would be. He anticipated it would cost £200,00/£300,000 to purchase a house in Edinburgh.

8. Paragraph 4(1) of Schedule 4B of the Child Support Act 1991 Provides that "The Secretary of State may by regulation prescribe other cases in which a variation may be agreed and Regulation 19(4) of the Child Support (Variations) Regulations 2000 is in the following terms: 'A case shall constitute a cast for the purposes of paragraph 4(1) of Schedule 4B to the Act where:

a. The non-resident parent has the ability to control the amount of income he receives, including earnings from employment or self employment, whether or not the whole of that income is derived from the company or business from which his earnings are derived and

b. The Secretary of State is satisfied that the non-resident parent has unreasonably reduced the amount of his income which would otherwise fall to be taken into account under the Maintenance Calculations and Special Cases Regulations by diverting it to other persons or for purposes other than the provision of such income for himself in order to reduce his liability to pay child support maintenance'

9. There was no doubt that the second respondent had the ability to control his income and did indeed choose to restrict his income. The question for the tribunal was whether he did so unreasonably in order to reduce his liability to pay child support maintenance. Whilst the appellant referred to a statement by the second respondent at page 74 of the appeal papers which indicated that the second respondent was aware that drawing more income from his company would be likely to increase his liability to provide financial support, the tribunal was not satisfied that this was the principal reason why funds were retained in the company. The tribunal accepted second respondent's explanation of why he was limiting his income. In particular the tribunal accepted found it significant that the second respondent gave no impression of seeking to evade his responsibilities in relation to the children. He had co-operated fully in providing information. He had been paying aliment voluntarily prior to the appellant's application for child support maintenance and continued to pay to the appellant a sum which exceeded the amount of the child support maintenance which had been assessed. There was also a long established pattern of income restriction which pre-dated the separation. Accordingly the tribunal did not agree a variation under Regulation 19.

10. In addition to the second respondent's assets of £196,140.58, the tribunal considered that the shareholder's funds in the second respondent's company were an asset for the purpose of Regulation18 of the foregoing Regulations. The second respondent had a 99% shareholding in the company and it was reasonable to base the value of the shares on the amount of the shareholder's funds. In broad terms the second respondent had assets of £500,000. However in terms of Regulation 18(3) the definition of 'asset' in Regulation 18(2) does not apply (Reg 18(3)(b)) 'in relation to any asset which the Secretary of State is satisfied is being retained by the non-resident parent to be used for a purpose which the Secretary of State considers reasonable in all the circumstances'.

11. The second respondent was retaining assets to provide for his future, to meet his wife's claims for a share of the matrimonial property and to purchase a house. As regards the latter it was noted that the matrimonial home was worth at least £650,000. The tribunal did not consider it unreasonable for the second respondent to be considering expenditure of between £2000,00 and £300,000 for a house in Edinburgh. Taking all these factors into account the tribunal determined that for the purposes of a variation the second respondent's assets at 16.9.03 were valued at £200,000".

Appeal to Commissioner

10. The PWC was given leave to appeal to the Commissioner and relevant grounds and arguments for the parties are set out below. The submissions were made separately on the Assets issue under Regulation 18 and the Income issue under Regulation 19.

Submission on Assets

11. Regulation 18, so far as material, provides:

"18.— Assets

(1) Subject to paragraphs (2) and (3), a case shall constitute a case for the purposes of paragraph 4(1) of Schedule 4B to the Act where the Secretary of State is satisfied there is an asset—

(a) in which the non-resident parent has a beneficial interest, or which the non-resident parent has the ability to control;

(b) which has been transferred by the non-resident parent to trustees, and the non-resident parent is a beneficiary of the trust so created, in circumstances where the Secretary of State is satisfied the non-resident parent has made the transfer to reduce the amount of assets which would otherwise be taken into account for the purposes of a variation under paragraph 4(1) of Schedule 4B to the Act; or

(c) …

(2) For the purposes of this regulation "asset" means —

(a) money, whether in cash or on deposit, including any which, in Scotland, is monies due or an obligation owed, whether immediately payable or otherwise and whether the payment or obligation is secured or not and the Secretary of State is satisfied that requiring payment of the monies or implementation of the obligation would be reasonable;

(b) …

(c) shares as defined in section 744 of the Companies Act 1985, stock and unit trusts as defined in section 6 of the Charging Orders Act 1979, gilt-edged securities as defined in Part 1 of Schedule 9 to the Taxation of Chargeable Gains Act 1992, and other similar financial instruments; or

(d) …

(3) Paragraph (2) shall not apply—

(a) where the total value of the assets referred to in that paragraph does not exceed £65,000 after deduction of–

(i) the amount owing under any mortgage or charge on those assets;

(ii) the value of any asset in respect of which income has been taken into account under regulation 19(1A);

(b) in relation to any asset which the Secretary of State is satisfied is being retained by the non-resident parent to be used for a purpose which the Secretary of State considers reasonable in all the circumstances of the case;

(c) …;

(d) except where the asset is of a type specified in paragraph (2)(b) and produces income which does not form part of the net weekly income of the non-resident parent as calculated or estimated under Part III of the Schedule to the Maintenance Calculations and Special Cases Regulations, to any asset used in the course of a trade or business; or …"

12. It was argued for the PWC, with responses noted as appropriate:

11.1 That the sum at credit to the NRP under "Director's loan account" in the company accounts should have been taken into account as an "asset" under Article 18(2)(a) as "monies due or obligation owed". The NRP said that the loan account was only in respect of monies due to him in respect of company expenses that he had already paid out his own pocket and this had been accepted by the CSA.

11.2 That the tribunal had erred in holding that the shareholders fund was an asset [see Statement of Reasons para 10], when in fact it was the shares that ought to have been regarded as the asset. There was no valuation of the shares and the tribunal erred in taking the value of the shareholder's fund. Regulation 18(2)(c) made clear that shares could be an asset. Further it was the whole share holding of 99 shares that was "the asset". It could not be broken down into individual shares or blocks of shares. Therefore under Regulation 18(3)(b) the reference to "any asset" meant the whole block of shares. This was the argument set out in paragraph 8 of the Secretary of State's submission that "only the whole of an asset could be disregarded". At the hearing Mr Brodie conceded that perhaps each share should be considered to be an asset as each share could be dealt with separately. The discussion moved onto how money in a bank account should be dealt with and whether one bank account holding was "the asset" of if each £ could be considered to be an asset.

11.3 That the tribunal had erred in not identifying the asset that had to be disregarded under Regulation 18(3)(b). The regulation provides that "in relation to any asset" fulfilling the criteria that paragraph (2) does not apply. The tribunal had erred in not identifying "the asset". The assets were listed at page 137, which comprised various bank accounts, pension funds etc as well as the shares and the director's loan fund. The tribunal ought to have identified the asset that was being retained for the purpose, which the Secretary of State considered reasonable. It was clear that the tribunal had not identified any particular asset and had merely divided up what they considered to be the total value of the assets and held that the particular value was being retained. Further the tribunal in paragraph 11 had identified 3 reasons for retention [PWC's claims for financial settlement on divorce; his expected legal fees and to buy a house once the divorce settlement was finalised]. Having identified three reasons, the tribunal erred in not identifying which asset was being retained for which purpose. Mr Brodie for the Secretary of State agreed that the tribunal had erred because there was ambiguity in paragraph 10 of the Statement of Reasons as to whether the tribunal had taken the shares or the shareholder's fund as the asset, but did not support the argument that tribunal necessarily had to divide up the overall assets and identify specifically, which asset was applied to which retention.

11.4 Mr Brodie advanced a further argument to the effect that the tribunal had also erred in that they had not considered the whole of Regulation 18(3) and in particular whether the shares were "any asset used in the course of a trade or business" under Regulation 18(3)(d). I raised the fact that this was not raised before the tribunal and whether it could be said that the tribunal had erred, when this was not raised as a ground on which the asset should be excluded under sub-paragraph (3). Ms Dowdalls for the PWC said it did not require to have been considered as it was not raised and in any event shares could not be considered to be an asset used by the NRP in a business as it was the company that was using the funds represented by the shares. I raised the question of whether or not I could lift the veil. Mr Brodie suggested I could as the sub-paragraph referred to "a trade or business" and not to the NRP's trade or business, but Ms Dowdalls said I could not. Regulation 19(4)(a) specifically referred to looking at income in a company controlled by the NRP, whereas there was no such reference in Regulation 18.

11.5 The NRP said that he was not a lawyer and could not comment on the distinctions that the lawyers sought be make between shares and shareholdings etc. He basically supported the decision of the tribunal.

Discussion and decision on assets

13. Director's loan fund

12.1 I agree that this is an asset of the NRP. The NRP says that it is money owed to him, in respect of expenses that he has paid on behalf of the company. I am willing to accept that. However, if he had not paid out that money on behalf of the company, he would [or could] still have had that money available to him. That money would have been an asset. The company would then have paid out that money direct and so its funds would have been reduced by that sum and would not have been shown as a creditor. The shareholders fund would have remained the same.

12.2 I do not consider that the tribunal erred in not taking into account this asset. It was never suggested to the tribunal that this was an asset that should be taken into account. While the PWC represented herself at the tribunal she was represented by Balfour & Manson Solicitors, who wrote to the CSA on a number of occasions and never suggested that this was an asset that should be taken into account. In these circumstances I hold that the tribunal did not err in law in not taking this into account.

12.3 However, as I hold that the tribunal erred for other reasons and I intend to substitute my decision for that of the tribunal, I will direct that the value of the Director's loan fund should be taken into account for the purposes of calculating the weekly value of the assets to be taken into account under Regulation 18(5) of the Variation Regulations 2000.

14. Shares or shareholder's funds.

13.1 I agree that it is the shares that are the asset and not the shareholder's fund for the purposes of Regulation18(2)(c). However, I do not agree that the tribunal erred, although I accept that paragraph 10 is not as clear as it might be. However, I consider that it is clear that the tribunal took into account the shares as the asset. While the tribunal does say "the shareholder's funds in the second respondent's company were an asset for the purposes of Regulation 18" the tribunal does go on to say the "second respondent has a 99% shareholding in the company and it was reasonable to base the value of the shares on the amount of the shareholder's funds". I consider that this makes it clear that the tribunal considered that the shares were the asset and went on to value to them by reference to the amount of the shareholder's fund.

13.2 I do not consider that the tribunal can be criticised for valuing the shares in this way. No professional share valuing evidence was placed before the tribunal, nor was any other method of valuing the shares suggested. In a company of this nature, which is just a vehicle through which the NRP trades his personal expertise, I consider that the value of the shares can reasonably be taken as the value of the funds in the company. I consider this approach was within the range of approaches to valuation that the tribunal was entitled to take in the absence of any other valuation or method of valuation being put to the tribunal.

15. What is "any asset"?

14.1 Ms Dowdalls suggested that all the shares in the company, as a shareholding, should be taken to be "the asset" and that each bank account was "an asset". Therefore under Regulation 18(3)(b) the particular asset had to be identified and the whole of that asset was excluded if it fell within the requirements of Regulation 18(3)(b), whether or not the value of the asset exceed the value of the purpose for which it was being retained.

14.2 I do not accept that analysis. It does make not make sense. For example say a NRP owned shares in a company value at £500,000 and this was his only asset. He was retaining funds to buy a house valued at £200,000 and this was accepted as a reasonable purpose in terms of Regulation 18(3)(b). It would be extraordinary if the whole share holding then fell to be excluded from being an asset for the purposes of assessment of child maintenance.

14.3 Similarly if in the example the NRP had two bank accounts holding £200,000 and £300,000 respectively, then it could be said that the £200,000 bank account should be excluded, but not the £300,000 account, because each account should be treated as a separate asset. However, if all the money was in one account, then on Ms Dowdalls' argument that whole account would fall to be excluded.

14.4 It is my opinion that where "property", and I use that word deliberately instead of "asset", is readily divisible, that for the purposes of Regulation 18 the "asset" can be taken to be that part of the property which qualifies under the purposes in Regulation 18(3). It is open to the CSA or to the tribunal to divide up the property into parcels and take a particular parcel as being the "asset" for the particular purpose.

14.5 Thus a shareholding in a company should not be taken to be the asset, but as the shareholding is readily divisible each share or a number of shares could be taken as the appropriate parcel that is the "asset". In a particular case a single share might of sufficient value that it is reasonable to divide the share.

14.6 Similarly I consider that where money is involved that the whole value of the money, whether it is in one bank account or a number of bank accounts, can be taken into account. The CSA or tribunal can then apportion the appropriate sum that is to be excluded under Regulation 18(3). The sum so apportioned would then be the "asset". In some cases it may be that it is appropriate to exclude a sum in a particular bank account and call that the "asset". In other cases, where there are a myriad of small accounts, it might be appropriate to define the "asset" as a particular sum of money irrespective of in which accounts it is salted away.

14.7 If an asset cannot be divided [e.g. a house or a Ming vase] then the whole of that asset will have to be excluded whether or not its value exceeds the value of the reasonable purpose – the issue then will be whether or not its retention is reasonable in all the circumstances.

14.8 However, I do accept that where there are different types of divisible property, that the whole of one type should be considered to be the "property" which is to be excluded in whole or in part and that the two types cannot be intermixed. Regulation 18(2) defines "asset" to mean broadly (a) money, (b) land, (c) shares and (d) choses in action. Therefore in excluding an asset for the purposes Regulation 18(3) the CSA or the tribunal would have to identify property in (a) to (d) separately even if parts of each property is then apportioned for the purposes of the regulation.

14.9 I therefore agree that the tribunal erred in law in lumping the shares and the money in together and then apportioning an overall value. I accept that the value of the apportionment ordered by the tribunal was reasonable in the circumstances and is not an apportionment that I ought to disturb. However to give effect to that apportionment lawfully, I consider that the tribunal ought to have excluded a particular number of shares under Article 9(3)(b).

14.10 The tribunal valued the shares by reference to the shareholders fund. This stood at £307,214 and so each share was valued at £ 3072.14. The NRP owned 99 of the 100 shares. To exclude £300,000 worth of shares, the tribunal ought to have determined that 98 shares [£300,000 ÷ £3072.14 = 97.65 rounded up to 98 shares] were the asset not to be taken into account under Regulation 18(3)(b).

14.11 I get support for my approach to how "asset" should be interpreted from CS/8/00, where the Commissioner was dealing with a smallholding that comprised a house and land. An issue arose as to whether it was open to the CSA to treat the asset as the house and the land separately or whether they had to treat the house and the land together. It was argued that this all depended on the circumstances and the Commissioner accepted this saying:

"13.    The tribunal was concerned with some farm land and a farm house. There are three items to which regulation 23 might be applied: (a) the farm house; (b) the farm land; (c) the farm house and land taken together as a smallholding. I asked how a tribunal should have decided which of these three items to consider.

14.    Ms Deas argued that it all depended on the circumstances of the case whether individual items should be considered separately or collectively as a parcel.

15. …

16 … The application for a departure direction under regulation 23 will identify one or more items. The nature of those items will determine whether some of them are capable sensibly of being considered as a parcel. Some items cannot be sensibly considered as a parcel. For example: an application may identify a house and shares in a company. Other items could be sensibly considered as a parcel. This case is an example. In cases like this, the tribunal was entitled to treat the items individually or collectively."

16. Reasonable purpose under Regulation 18(3)(b)

15.1 It was argued that the tribunal had failed to divide up the three reasonable purposes and assign particular assets to those purposes. I have dealt with the asset issue. In the present case there were three accepted reasonable purposes and a difficulty to assign accurate sums to each purpose, because they were purposes that were to crystallise in value in the future. In these circumstances I consider that the tribunal was entitled to assign a broad value to the three purposes and did not require apportion that value between the purposes. In terms of the Interpretation Act 1978 singular includes the plural, so that "asset" or "purpose" in Regulation 18(3)(b) could be "assets" and "purposes". Therefore one asset could be retained for more than one purpose.

17. Regulation 18(3)(d) – used in a trade or business

16.1 I agree with Ms Dowdalls that the tribunal did not have to consider whether the assets fell to be excluded under Regulation 18(3)(d). Nobody suggested that the assets fell to be excluded under this heading and therefore the tribunal did not have to consider it. It was therefore not an error of law not to consider it.

16.2 If the tribunal did have to consider Regulation 18(3)(b), what ought the tribunal to have made of the regulation.

16.2.1 The preamble is not relevant here, so the tribunal would have had to consider whether the shares were "any asset used in the course of a trade or business". It is of significance that it is "a trade or business", so it would not appear to have to be the NRP's business. Clearly a company is not using the shares in the course of the business although the company will be using the funds represented by those shares in the business.

16.2.2 If a share is an asset that can be used in a business, then any shares held by a NRP in, say, ICI would be an "asset used in the course of a … business" and would fall to be excluded. That cannot have been the intention. If shares are excluded from being an asset that can be used in a trade or business then this might lead to similar cases being dealt with in different ways, but that is often an unavoidable consequence of legislation. For example a self employed plumber who put £1000 working capital into his business bank account would qualify under this regulation, whereas the same plumber who incorporated a company and put in £1000 by way of shares as working capital for the company would not qualify, because the shares [the asset] were not being used in the course of a business, albeit the funds represented by those shares would be so used.

16.2.3 It is my opinion, that despite the inequities that might arise, that shares cannot be taken to be an asset used in the course of a trade or business, because the shares are not being used in the business. To hold otherwise would be to lift the corporate veil and there is nothing to suggest that his can be done under regulation 18, in contrast to the provisions in Regulation 19(4)(a) where there is reference to control of income whether or not the income is derived from a company. The plumber shareholder would have the protection of Regulation 18(3)(b) if he could persuade the Secretary of State that he was retaining the shares for a reasonable purpose – admittedly a discretionary exclusion rather than an exclusion as of right.

16.2.4 Therefore, for this reason as well, the tribunal did not err in not having regard to Regulation 18(3)(d). Even if they had had regard to his regulation they would have had to conclude that it did not apply to the shares.

Submission on reduction of income

18. Regulation 19, so far as material, provides:

19.— Income not taken into account and diversion of income

…

(4) A case shall constitute a case for the purposes of paragraph 4(1) of Schedule 4B to the Act where—

(a) the non-resident parent has the ability to control the amount of income he receives, including earnings from employment or self-employment, whether or not the whole of that income is derived from the company or business from which his earnings are derived, and

(b) the Secretary of State is satisfied that the non-resident parent has unreasonably reduced the amount of his income which would otherwise fall to be taken into account under the Maintenance Calculations and Special Cases Regulations or paragraph (1A) by diverting it to other persons or for purposes other than the provision of such income for himself."

19. It was argued for the PWC, with responses noted as appropriate:
20. 1 Long established pattern of income restriction.

18.1.1 That the tribunal erred in holding that there was a long established pattern of income restriction which pre-dated the separation – paragraph 9 of the Statement of Reasons. My attention was drawn to the accounts and to the Accountant's summary on page 129 which showed that the income was £26,500 in 2000, £39,650 in 2001 and £32,650 in 2002. Also there was a dividend of £20,000 in 2000. Those figures showed clearly that there had been a reduction of income between 2001 and 2002 and so no tribunal could reasonably have conclude that there was a long established pattern of income restriction predating the separation.

18.1.2 The NRP said that his income was £32,650 in each year and that the difference between the years was that the full rate of income in 2000 only went through the company accounts in 2001, so if one deducted £32,650 from £39,650 and added it to £26,500 one could see he was drawing broadly the same amount each year. He had produced the income tax and NIC records to the CSA.

18.1.3 Whatever the meaning and effect of the accounts and page 129, it is clear that there was material before the tribunal from which it could determine that the pay drawn was the same each year and that there was a long established income restriction which pre-dated the separation. This is noted at page 8 in the NRPs representations to the CAS and similar evidence was given to the tribunal by the NRP [pages 132, 133 & 135]. In these circumstances the tribunal was entitled to reach the conclusion that they did on the evidence before them and to prefer the explanation given by the NRP to the figures that appear in the Accounts and in the summary on page 129. The issue of the one off dividend was not raised before the tribunal and they were dealing with income from the company, rather than the potential to pay a dividend.

18.1.4 The NRP gave the same explanation to me at the hearing and followed it up with further material from Sinclair Wood & Co, the company accountants. This was sent in after the hearing and circulated for comment. Only the Secretary of State commented and said that it supported the contention that the NRP was not diverting income. Sinclair Wood & Co explain that the there was a salary increase from 1 December 2003, but this was not implemented through the payroll until 30 July 2001, which explains why different salary figures appear in the accounts, even though the salary remained the same each year. This additional material supports the conclusion reached by the tribunal.

21. 2 The "principal reason" test.

18.2.1 It was then argued that the tribunal erred in applying the wrong test. In paragraph 9 the tribunal refers to "the principal reason". There was no reference in paragraph 19(4) to the principal reason. It was enough that it was a reason, and if it was a reason, then the amount by which the income had been reduced for that reason should be determined. I was referred to page 74 paragraph 2 where the NRP wrote "Any cash removed from the company in the future … immediately becomes … liable to … child maintenance". This showed that the income was being reduced in order to reduce liability for child maintenance.

18.2.2 Mr Brodie for the Secretary of State said that the paragraph could be read to mean that the NRP was setting out the consequences of paying out more and was not necessarily an indication of a deliberate reduction in income to avoid child maintenance. He went on to say that the tribunal was right to apply the principal reason test. As this paragraph possibly had different meanings it was a matter for the tribunal to assess.

18.2.3 I agree with the submission for the Secretary of State. I do not accept that page 74 necessarily shows that the NRP was reducing his income for the purposes of reducing child maintenance liability. The tribunal heard the evidence and say that they accept the NRP's explanation of why he was limiting his income. They were entitled to reach this conclusion on the evidence before them. Accordingly I do not consider that the tribunal erred in law. I consider there were entitled to hold that the case in Regulation 19(4) did not apply.

22. 3 "has unreasonably reduced the amount of his income

18.3.1 I raised the question of what "has … reduced" meant in Regulation 19(4)(b) and from what datum point was the reduction to be measured. Neither Counsel was able to give a reasonable construction and various approaches were suggested. This is particularly relevant in this case, if the tribunal's determination is accepted that there was a long established pattern of income restriction pre-dating the separation. On this basis the NRP had not reduced his income, if the datum was the date of separation, because his annual income remained the same. Therefore the question of reasonableness does not come into effect, because there had been no income reduction.

18.3.2 I have come to the conclusion that "has … reduced" is not referable to any datum. The question arises each time the NRP receives income or could have received it, if he has the ability to control the amount of income he receives. Each time he receives income or could have received income, the question is did he unreasonably reduce the income for one of the prohibited purposes. Therefore I consider that whether or not there was a long established pattern of income restriction, is an irrelevant consideration in relation to the "has … reduced" issue and therefore it matters not what his income was before or after the separation. The question for the tribunal was whether or not the income being received at the relevant assessment date was being unreasonably reduced. The tribunal accepted the NRP's explanation. Clearly the long established pattern of income restriction is a relevant factor to be taken into consideration in determining whether or not the reduction was reasonable. I consider that paragraph 9 of the Statement of Reasons makes it clear that this is how the tribunal approached the question. The tribunal accepted the NRP's explanation and the reasons they accepted the explanation included the finding about the long established pattern of income restriction. I therefore do not consider the tribunal erred in law.



Summary

For these reasons I hold that the tribunal erred in law. I hold that I can give the decision that the tribunal ought to have given.

(Signed)

Sir Crispin Agnew of Lochnaw Bt QC

Deputy Commissioner

Date: 25 October 2005